Budget blow to middle earners

MIDDLE-INCOME families will lose as much as £100 a year under changes to tax credits slipped out in Chancellor Gordon Brown's Pre-Budget Report.

Almost three million families will fall victim to a decision to freeze key elements of two tax credits which go to the vast majority of families in Britain.

In his Commons statement on Wednesday the Chancellor trumpeted bigger child tax credit payments for the poorest families. But the small print reveals that the extra help will be funded, in part, by redistributing the money from wealthier families claiming the same tax credit.

Families claiming a second credit, the working tax credit, will also lose out by about £1 a week. In all, better-off families will lose £240m.

In an extraordinary attempt to justify the decision, the Treasury claimed that the families losing out 'don't need the money'. The comment put a question mark over why they were given the help in the first place, when the Chancellor introduced his flagship child tax credit only eight months ago.

It has been marred by administrative chaos at the Inland Revenue, claims that the system is too complex, and the failure by as many as half am eligible families to claim it.

Critics accused the Chancellor of levelling a new 'stealth tax' on middle Britain. The child tax credit is paid directly to mothers, largely by redirecting tax paid by fathers.

In part, it replaced the old married couples' allowance. It goes to families whose joint pretax earnings are up to £55,000 a year.

For lower-income families the credit is worth more than £1,500 a year but those at the upper end of the income scale receive a flat-rate £545 a year. This sum will be frozen year on year, so that its value is gradually eroded by inflation.

Earnings thresholds within the credit system will also be frozen, with lower-earners benefiting at the expense of higher earners. The Institute of Fiscal Studies calculates that a family with a joint income of £52,000 would receive £412 in child tax credit this year. If all the elements of the system had been uprated with inflation they would have received £520 - meaning that they had suffered a net loss of £108.

The IFS said 2.9m families would lose out. Those affected are mostly on above-average incomes but they do not include top earners, who are already ineligible for tax credits.

A Treasury spokesman said: 'We have ensured that we target these measures on the families who need it most - the poorest families. If we were to increase the whole thing, it would mean that those families who don't need the money would be getting it.'

But Tory work and pensions shadow David Willetts said: 'The tax system used to help all families with the cost of children. Now the Chancellor has introduced an even tighter new means-test which penalises middle Britain's hard-working families.'

Mr Brown announced a £3.50-a-week increase in the 'child element' but did not mention he would claw back some of the money by freezing the 'family element' and thresholds.